Hot Topics

First American Financial Reports Second Quarter 2013 Results

First American Financial Corporation (NYSE: FAF), a leading global
provider of title insurance and settlement services for residential and
commercial real estate transactions, today announced financial results
for the...

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance and settlement services for residential and commercial real estate transactions, today announced financial results for the second quarter ended June 30, 2013.

Current Quarter Highlights

Total revenues up 18 percent compared with last year

Title Insurance and Services segment pretax margin of 6.1 percent

Adjusted pretax title margin of 13.4 percent, excluding $89.0 million reserve strengthening, or 730 basis points, primarily due to domestic lender claims for policy years 2004-2008

Title order mix continues to shift toward higher-premium resale transactions

Resale open orders per day up 19 percent compared with last year

Refinance open orders per day down 9 percent compared with last year

Commercial division revenues of $133.0 million, up 35 percent compared with last year

Specialty Insurance segment total revenues up 6 percent, with a pretax margin of 8.7 percent

Cash flow from operations of $209.3 million

Repurchased 1.6 million common shares for $35.6 million in June and July

Selected Financial Information

($ in millions, except per share data)

For the Three Months Ended

June 30

2013

2012

Total revenues

$

1,288.5

$

1,089.8

Income before taxes

59.2

112.3

Net income

$

34.7

$

73.0

Net income per diluted share

0.31

0.68

Total revenues for the second quarter of 2013 were $1.3 billion, an increase of 18 percent relative to the second quarter of 2012. Net income in the current quarter was $34.7 million, or 31 cents per diluted share, compared with net income of $73.0 million, or 68 cents per diluted share, in the second quarter of 2012. The current quarter results include an $89.0 million reserve strengthening, or 48 cents per diluted share net of tax. The current quarter results also include net realized investment gains of $4.5 million, or 2 cents per diluted share, compared with net realized investment gains of $11.6 million, or 6 cents per diluted share, in the second quarter of 2012.

“Our business gained momentum in the second quarter as the housing market continued to improve,” said Dennis J. Gilmore, chief executive officer for First American Financial Corporation. “Strength in our title insurance segment drove revenue up 18 percent. Our commercial division’s performance was particularly strong, with revenues up 35 percent compared with last year.

“Year to date, our paid title claims are down 8 percent as compared with the prior year and our most recent policy years continue to perform well, with ultimate loss rates below historical averages. While claims from our legacy policy years have generally declined, they are not falling at the pace that we expected and, as a result, we strengthened our reserves in the quarter. Although the reserve strengthening impacted our otherwise strong results, it does not alter our long-term outlook for the business.

“The strong spring selling season has continued into summer, with resale orders in July remaining at the peak levels of May and June. On the refinance side, the surge in mortgage rates beginning in May impacted transaction activity with orders declining sharply through the end of June, but leveling out thus far in July.

“In June and July, we repurchased 1.6 million common shares at an average price of $21.92 for a total of $36 million. We purchased these shares based on our strong capital position and the long-term value we see in our stock relative to other investment opportunities.”

Title Insurance and Services

($ in millions, except average revenue per order)

For the Three Months Ended

June 30

2013

2012

Total revenues

$

1,205.0

$

1,012.0

Income before taxes

$

73.0

$

118.4

Pretax margin

6.1

%

11.7

%

Direct open orders

421,500

411,200

Direct closed orders

321,300

289,300

Commercial*

Total revenues

$

133.0

$

98.2

Open orders

23,600

19,100

Closed orders

11,800

12,100

Average revenue per order

$

10,200

$

7,100

* Includes commercial activity from the National Commercial Services division only.

Total revenues for the Title Insurance and Services segment were $1.2 billion, a 19 percent increase from the same quarter of 2012. Direct premiums and escrow fees were up 21 percent from the second quarter of 2012, driven by an 11 percent increase in the number of direct title orders closed in the quarter and a 9 percent increase in the revenue per direct title order to $1,593. The increase in revenue per direct title order was primarily attributable to higher real estate prices and an increase in the number of large commercial deals that closed in the quarter. Agent premiums were up 24 percent in the current quarter, which is consistent with the increase in direct premiums during the previous quarter, reflecting the typical reporting lag of approximately one quarter.

Information and other revenues were $171.1 million this quarter, up 2 percent compared with the same quarter of last year. The increase was primarily due to higher demand for the company’s residential and commercial title information products, partially offset by lower demand for title-related services in Canada.

Total investment income was $25.3 million in the second quarter, an increase of $5.2 million from the second quarter of 2012. This increase was primarily due to higher interest and dividends from the investment portfolio and the impact of certain impairments that negatively affected the second quarter of 2012, partly offset by lower net realized investment gains in the current quarter.

Personnel costs were $340.0 million in the second quarter, an increase of $40.7 million, or 14 percent, compared with the second quarter of 2012. This increase was primarily due to higher staffing levels required to support the increase in order volume and higher incentive compensation driven by the growth in revenues.

Other operating expenses were $216.2 million in the second quarter, up $26.5 million, or 14 percent, compared with the second quarter of 2012. The increase was primarily due to higher production-related expenses and temporary labor costs driven by the increase in order volumes.

The provision for policy losses and other claims was $149.5 million in the second quarter, or 14.8 percent of title premiums and escrow fees, up $94.7 million compared with the same quarter of the prior year. The current quarter rate of 14.8 percent reflects an ultimate loss rate of 5.8 percent for the current policy year and an $89.0 million net increase in the loss reserve estimates for prior policy years. The increase in loss reserve estimates for prior policy years reflects claims development above expected levels, primarily attributable to domestic lender policies from policy years 2004 through 2008.

Pretax income for the Title Insurance and Services segment was $73.0 million in the second quarter, compared with $118.4 million in the second quarter of 2012. Pretax margin was 6.1 percent in the current quarter, compared with 11.7 percent last year.

Specialty Insurance

($ in millions)

For the Three Months Ended

June 30

2013

2012

Total revenues

$

84.0

$

79.6

Income before taxes

$

7.3

$

13.3

Pretax margin

8.7

%

16.7

%

Total revenues for the Specialty Insurance segment were $84.0 million in the second quarter of 2013, an increase of 6 percent compared with the second quarter of 2012. The increase in revenues was driven by higher premiums earned in both the home warranty and property and casualty business lines, partially offset by lower net realized gains in the current quarter. The overall loss rate in the Specialty Insurance segment was 61 percent in the current quarter, above the 56 percent loss rate in the prior year. Both business lines experienced higher losses in the quarter, resulting in a pretax margin of 8.7 percent, down from 16.7 percent in the second quarter of 2012.

Teleconference/Webcast

First American’s second quarter 2013 results will be discussed in more detail on Thursday, July 25, 2013, at 11 a.m. ET, via teleconference. The toll-free dial-in number is (800) 619-2658. Callers from outside the United States may dial (773) 756-4600. The passcode for the event is “First American.”

The live audio webcast of the call will be available on First American’s website at www.firstam.com/investor. An audio replay of the conference call will be available through July 31, 2013, by dialing (203) 369-3836. An audio archive of the call will also be available on First American’s investor website.

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance and settlement services to the real estate and mortgage industries, that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; property and casualty insurance; and banking, trust and investment advisory services. With revenues of $4.5 billion in 2012, the company offers its products and services directly and through its agents throughout the United States and abroad. More information about the company can be found at www.firstam.com.

Website Disclosure

First American posts information of interest to investors at www.firstam.com/investor. This includes opened and closed title insurance order counts for its direct title insurance operations, which are posted approximately 12 days after the end of each month.

Forward-Looking Statements

Certain statements made in this press release and the related management commentary and responses to investor questions, including but not limited to those related to the outlook for the housing market and its effects on the company; future refinance, purchase and commercial volumes; the decline in refinance business being offset by future strength in the company’s purchase and commercial businesses; focus on organic growth in the core title business; and future title claims experience and loss rates, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may contain the words “believe,” “anticipate,” “expect,” “plan,” “predict,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements include: interest rate fluctuations; changes in the performance of the real estate markets; volatility in the capital markets; unfavorable economic conditions; impairments in the company’s goodwill or other intangible assets; failures at financial institutions where the company deposits funds; changes in applicable government regulations; heightened scrutiny by legislators and regulators of the company’s title insurance and services segment and certain other of the company’s businesses; regulation of title insurance rates; reform of government-sponsored mortgage enterprises; limitations on access to public records and other data; product migration; changes in relationships with large mortgage lenders; changes in measures of the strength of the company’s title insurance underwriters, including ratings and statutory capital and surplus; losses in the company’s investment portfolio; expenses of and funding obligations to the pension plan; material variance between actual and expected claims experience; defalcations, increased claims or other costs and expenses attributable to the company’s use of title agents; systems interruptions and intrusions, wire transfer errors or unauthorized data disclosures; inability to realize the benefits of the company’s offshore strategy; inability of the company’s subsidiaries to pay dividends or repay funds; and other factors described in the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2013, as filed with the Securities and Exchange Commission. The forward-looking statements speak only as of the date they are made. The company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

Use of Non-GAAP Financial Measures

This news release and related management commentary contain certain financial measures that are not presented in accordance with generally accepted accounting principles (GAAP), including an adjusted pretax title margin and personnel and other operating expense ratios. The company is presenting these non-GAAP financial measures because they provide the company’s management and investors with additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the company’s competitors. The company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. In this news release, these non-GAAP financial measures have been presented with, and reconciled to, the most directly comparable GAAP financial measures. Investors should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures.

First American Financial Corporation

Summary of Consolidated Financial Results and Selected Information

(in thousands, except per share amounts and title orders)

(unaudited)

For the Three Months Ended

For the Six Months Ended

June 30

June 30

2013

2012

2013

2012

Total revenues

$

1,288,464

$

1,089,833

$

2,435,227

$

2,056,596

Income before income taxes

$

59,224

$

112,290

$

118,816

$

163,840

Income tax expense

24,276

38,773

47,636

59,214

Net income

34,948

73,517

71,180

104,626

Less: Net income attributable to noncontrolling interests

276

516

330

332

Net income attributable to the Company

$

34,672

$

73,001

$

70,850

$

104,294

Net income per share attributable to stockholders:

Basic

$

0.32

$

0.69

$

0.66

$

0.98

Diluted

$

0.31

$

0.68

$

0.64

$

0.97

Cash dividends declared per share

$

0.12

$

0.08

$

0.24

$

0.16

Weighted average common shares outstanding:

Basic

108,210

106,230

107,881

105,926

Diluted

110,311

107,945

110,072

107,681

Selected Title Information

Title orders opened

421,500

411,200

798,100

788,400

Title orders closed

321,300

289,300

612,700

550,600

Paid title claims

$

69,148

$

71,850

$

140,485

$

152,305

First American Financial Corporation

Selected Balance Sheet Information

(in thousands)

(unaudited)

June 30,

2013

December 31,

2012

Cash and cash equivalents

$

861,835

$

627,208

Investment portfolio

3,145,223

3,113,560

Goodwill and other intangible assets

891,188

902,952

Total assets

6,302,979

6,050,847

Reserve for claim losses

1,054,450

976,462

Notes payable

314,779

229,760

Total stockholders' equity

$

2,342,220

$

2,348,065

First American Financial Corporation

Segment Information

(in thousands, unaudited)

For the Three Months Ended

Title

Specialty

Corporate

June 30, 2013

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues

Direct premiums and escrow fees

$

593,205

$

511,918

$

81,287

$

-

Agent premiums

496,730

496,730

-

-

Information and other

171,522

171,104

424

(6

)

Investment income

22,485

21,599

1,787

(901

)

Net realized investment gains (1)

4,522

3,696

525

301

1,288,464

1,205,047

84,023

(606

)

Expenses

Personnel costs

364,767

340,046

14,905

9,816

Premiums retained by agents

396,024

396,024

-

-

Other operating expenses

232,765

216,230

9,859

6,676

Provision for policy losses and other claims

198,766

149,534

49,232

-

Depreciation and amortization

18,192

16,260

1,209

723

Premium taxes

14,795

13,268

1,527

-

Interest

3,931

645

-

3,286

1,229,240

1,132,007

76,732

20,501

Income (loss) before income taxes

$

59,224

$

73,040

$

7,291

$

(21,107

)

For the Three Months Ended

Title

Specialty

Corporate

June 30, 2012

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues

Direct premiums and escrow fees

$

497,288

$

424,146

$

73,142

$

-

Agent premiums

400,361

400,361

-

-

Information and other

167,827

167,411

418

(2

)

Investment income

12,789

12,283

2,231

(1,725

)

Net realized investment gains (1)

11,568

7,771

3,797

-

1,089,833

1,011,972

79,588

(1,727

)

Expenses

Personnel costs

322,043

299,348

13,717

8,978

Premiums retained by agents

321,348

321,348

-

-

Other operating expenses

205,647

189,759

9,594

6,294

Provision for policy losses and other claims

95,389

54,820

40,569

-

Depreciation and amortization

18,456

16,669

1,116

671

Premium taxes

12,228

10,922

1,306

-

Interest

2,432

661

-

1,771

977,543

893,527

66,302

17,714

Income (loss) before income taxes

$

112,290

$

118,445

$

13,286

$

(19,441

)

(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.

First American Financial Corporation

Segment Information

(in thousands, unaudited)

For the Six Months Ended

Title

Specialty

Corporate

June 30, 2013

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues

Direct premiums and escrow fees

$

1,071,056

$

911,902

$

159,154

$

-

Agent premiums

981,195

981,195

-

-

Information and other

323,655

322,852

814

(11

)

Investment income

45,543

40,585

3,466

1,492

Net realized investment gains (1)

13,778

11,092

2,100

586

2,435,227

2,267,626

165,534

2,067

Expenses

Personnel costs

709,267

656,889

29,236

23,142

Premiums retained by agents

783,567

783,567

-

-

Other operating expenses

438,111

404,843

20,078

13,190

Provision for policy losses and other claims

314,792

226,894

87,898

-

Depreciation and amortization

36,587

32,744

2,387

1,456

Premium taxes

26,912

24,172

2,740

-

Interest

7,175

1,209

-

5,966

2,316,411

2,130,318

142,339

43,754

Income (loss) before income taxes

$

118,816

$

137,308

$

23,195

$

(41,687

)

For the Six Months Ended

Title

Specialty

Corporate

June 30, 2012

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues

Direct premiums and escrow fees

$

911,074

$

767,785

$

143,289

$

-

Agent premiums

777,347

777,347

-

-

Information and other

323,587

322,700

893

(6

)

Investment income

33,923

29,604

4,696

(377

)

Net realized investment gains (1)

10,665

5,757

4,908

-

2,056,596

1,903,193

153,786

(383

)

Expenses

Personnel costs

627,322

576,925

27,380

23,017

Premiums retained by agents

623,512

623,512

-

-

Other operating expenses

394,797

361,510

20,637

12,650

Provision for policy losses and other claims

182,067

107,000

75,067

-

Depreciation and amortization

36,515

33,002

2,172

1,341

Premium taxes

23,076

20,655

2,421

-

Interest

5,467

1,322

-

4,145

1,892,756

1,723,926

127,677

41,153

Income (loss) before income taxes

$

163,840

$

179,267

$

26,109

$

(41,536

)

(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.

First American Financial Corporation

Expense Ratio Reconciliation

Title Insurance and Services Segment

($ in thousands, unaudited)

For the Three Months Ended

For the Six Months Ended

June 30

June 30

2013

2012

2013

2012

Total revenues

$

1,205,047

$

1,011,972

$

2,267,626

$

1,903,193

Less: Net realized investment gains (1)

3,696

7,771

11,092

5,757

Investment income

21,599

12,283

40,585

29,604

Premiums retained by agents

396,024

321,348

783,567

623,512

Net operating revenues

$

783,728

$

670,570

$

1,432,382

$

1,244,320

Personnel and other operating expenses

$

556,276

$

489,107

$

1,061,732

$

938,435

Ratio (% net operating revenues)

71.0

%

72.9

%

74.1

%

75.4

%

Ratio (% total revenues)

46.2

%

48.3

%

46.8

%

49.3

%

(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.